203(k) home renovation loan among 'best-kept secrets'

When Emre Bicer bought a Clifton, N.J., home, he decided to upgrade it before moving in. He had the roof replaced, a bathroom renovated and the wood floors refinished.

Kathleen Lynn

When Emre Bicer bought a Clifton, N.J., home, he decided to upgrade it before moving in. He had the roof replaced, a bathroom renovated and the wood floors refinished.

"It looks like a brand-new house," said Bicer, a 25-year-old information technology professional who bought the home with his brother.

The Bicers paid for all this work with a special type of loan backed by the Federal Housing Administration. The loan, called a 203(k), is used for renovations and is different in several crucial ways from a home equity loan.

It's not right for everyone, but it is useful for homeowners or buyers who don't have much equity in the property, as well as for those who would like extra oversight on their contractors' work.

Bill Trees, a vice president with Wells Fargo, calls 203(k)s "one of the industry's best-kept secrets." Some lenders are pitching these loans to

homeowners whose houses were badly damaged by Superstorm Sandy.

"You have people who have been affected by Sandy who think the only thing that's available is FEMA (the Federal Emergency Management Agency) or insurance," said Jeff Onofrio of AnnieMac, a mortgage lender based in Mount Laurel, N.J., that serves clients around the state.

But, he said, 203(k)s can help some of these homeowners if their insurance doesn't cover all the needed repairs. Onofrio said banks typically won't lend on a badly damaged house because it has little value, but a 203(k) allows homeowners to borrow against the after-improvement value of the home.

The 203(k)s, which are not available to investors, generally come with higher fees and interest rates than home equity loans, because they carry FHA insurance. The interest rate is typically about three-eighths of a percentage point higher than a similar home equity loan, according to Steve Marshall, national director of renovation loans at River Edge, N.J.-based Real Estate Mortgage Network. And the homeowner must pay a fee to a consultant who oversees the construction work and may also face an extra lender's origination fee of up to $350.

The loans also require more paperwork, lenders say.

"There are more steps than a typical refinance or a typical home equity loan," Trees said.

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